The clearing of credit defaults swaps took another step forward last week as the Securities and Exchange Commission granted CME Group a special exemption for clearing and trading CDS using its CME unit and CMDX platform. The exemption allows CME Group to “launch CDS clearing and trading in the U.S.,” according to the firm.

But Timothy A. Canova, professor of international economic law and associate dean for academic affairs at Chapman University School of Law, believes clearing may be too late to prevent further concerns, pointing to the still unwinding of AIG positions.

“There’s been a lot of attention on the AIG bonuses which total about $160 million”, he says. “But the bonuses are a distraction compared to the real big issue of AIG’s payout of tens of billions of dollars because of its derivatives business. There’s been far less attention on the $40 billion that AIG paid out to ten banks, many of them foreign banks, and more billions to unregistered hedge funds, all to pay off AIG liability on credit default swap counterparties.” The cleanup may continue for a long time, Canova warns. “The CDS market is already so dangerously over-leveraged that the question now is how to handle these enormous claims on AIG, perhaps to the tune of hundreds of billions of dollars more.”  

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